Bluewater says new rule raises costs

Department of Interior demands hard-to-predict 2 percent royalty on revenues

The federal government's new rules governing offshore wind farms make it more costly to finance the massive construction projects, the president of Bluewater Wind said Tuesday.

Bluewater is planning to build a wind farm off the coast of Rehoboth Beach, and will need to spend millions buying the components and putting up the turbines.

In new federal permitting rules published last month, the U.S. Department of the Interior said offshore wind farm operators will need to pay 2 percent of revenues as a royalty to the federal government.

That 2 percent is calculated using a formula that relies largely on the wholesale price of electricity.

Volatile fossil fuel prices make it hard to predict what this price will be, said Peter Mandelstam, Bluewater president. That, in turn, makes it harder for banks to predict wind projects' profits, which will lead to higher financing rates, Mandelstam said.

"It is going to make it more challenging to finance the project, because one of the costs that must be covered by the debt and equity is unknown and unknowable," Mandelstam said.

Bluewater managers expressed optimism that the rule could be changed, and gratitude about the speed with which the Obama administration has moved the rules along so developers can get started planning their projects.

Jeremy Firestone, associate professor at the University of Delaware, said it adds a level of uncertainty for Bluewater, which is seeking new buyers for its energy. It also will mean consumers will pay more because developers will fold the uncertainty into the energy price, Firestone said.

"Uncertainty costs money," he said.

Delmarva Power customers won't see additional price increases because it already has a price locked into its contract with Bluewater.

Deepwater Wind spokesman Jim Lanard declined to criticize the rule.

Deepwater is competing with Bluewater for wind power contracts in New Jersey and Maryland.

"If there are minor tweaks down the road that need to be addressed, we're confident they will be resolved," he said. "Nevertheless, we can live with the regime they have proposed now."

Meanwhile, players in the offshore wind industry descended Tuesday upon Chicago for the American Wind Energy Association's Windpower 2009 conference. Attendees reported long lines to get into the McCormick Place Convention Center.

Mandelstam is chairman of the association's offshore wind working group, which met at a members-only event Tuesday.

Interior Secretary Ken Salazar opened the conference, and in his speech made prominent references to offshore wind.

Lanard said this is his third annual wind power convention, and has seen a marked increase in interest in offshore wind power, which has usually taken a back seat at such events to land-based wind power.

The crowds attending offshore wind sessions are continuing to grow, with higher-level representatives of various companies attending the sessions, he said. "They're now becoming very senior," he said.

Instead of having the chance to wander the conference, Deepwater has back-to-back meetings planned for today with potential European suppliers, Lanard said.

He said it's part of a broader effort by the government and developers to woo foreign companies that currently supply European wind farms to build parts in the United States.

"It will help grow an industry that right now does not exist," Lanard said.